Real Estate Advice: What the new tax law means for homeowners

Q: I heard the new tax law has eliminated the interest deduction on home equity loans. Is this true?

A: Yes and no. The new law severely restricts when interest can be deducted on a home equity line of credit or second mortgage, but has left it mostly intact in certain, very specific situations.

Previously, homeowners could borrow against the equity in their homes and deduct the interest on the loan on their federal tax returns regardless of how they used the proceeds. Beginning Jan. 1, 2018, when the new law went into effect, if borrowers want to deduct the interest on a HELOC or second mortgage, they must use the proceeds only for substantial improvements to the home. Additionally, the combined total of their first mortgage balance and the HELOC or second mortgage cannot exceed the new $750,000 limit to qualify for the mortgage interest deduction. The previous ceiling was $1.1 million for first mortgage and HELOC combined.

Before the tax law change, home equity loans and second mortgages were popular ways for homeowners to borrow money to pay for college, vacations, a new car, etc. because the interest on the loans could be deducted. That interest deduction has now been eliminated unless the HELOC or second mortgage is used only for capital improvements to the home, or buying or building a principal residence, and the total mortgage debt does not exceed $750,000. (What constitutes “capital improvements” is spelled out in IRS publication 530.)

While the interest deduction on HELOCs and second mortgages has been severely restricted by the new tax law, the loans remain a good low-cost option for homeowners. With or without the interest deduction, HELOCs and second mortgages are likely to remain popular ways for homeowners to tap some of the equity in their homes. The major difference is that now if homeowners want to deduct the interest on the loan they must restrict their spending to home improvements. Others who simply want to tap into some of the equity they have built up at attractive interest rates and use the money for whatever they choose will still be able to obtain HELOCs and second mortgages the same way they did in the past. Just not deduct the interest. And for homeowners who plan to take advantage of the higher standard deductions in the new tax law ($12,000 and $24,000) and not itemize, the loss of the home equity interest deduction is not an issue at all.

Linda Goodspeed is a longtime real estate writer and author of "In and Out of Darkness." Email her at lrgoodspeed@comcast.net.